Valuation methods for house & apartment

The property type determines the valuation method used to determine the market value. There are various standardized valuation methods for determining the market value of properties.

Comparison of valuation methods: quick overview

As a rule, at least 2 of these procedures are calculated simultaneously:

1. Comparative value method
2. Income capitalization approach
3. Asset value method
4. Residual procedure
5. Determination of mortgage lending value

Comparative value method for undeveloped properties & ETWs

What does the comparative value method mean?

In the comparative value method, we simply look at what similar properties or properties nearby have sold for and use these prices as a reference to determine the value of a property.

It’s like saying, “This property is similar to the ones that have sold recently, so it will probably have a similar price.”

This valuation method is based on a comparison of sales prices of similar properties or apartments in the surrounding area. Various factors are taken into account, such as the size of the property, the location, the local infrastructure and other features that can influence the value of the property. By comparing with similar transactions, real estate valuers can make a realistic estimate of the current market value.

Explained quickly and simply:

• Determination of the land value by comparison with similar properties / real estate
• Based on the idea that similar properties achieve similar prices

Read more about the:

• Comparative value method

Income capitalization approach for rented properties

What does the income capitalization approach mean?

In the income capitalization approach, we estimate the value of a property based on the rental income it can generate. If a property has high rental income or has the potential to generate it, its value is estimated higher. It’s like looking into the future to see how profitable the property could be.

This method focuses on the potential income that the property can generate. For this purpose, the current or expected rental income is used and converted into a capital value using a capitalization factor. This capital value forms the basis for the valuation of the property. In addition to rental income, other factors are also taken into account, such as operating costs, tenant turnover, any vacancy periods and possible future developments in the market environment. The income capitalization approach thus enables a sound assessment of the long-term economic potential of a rented property.

Explained quickly and simply:

• Capitalization of the income generated
• Main method for the valuation of rented properties, land and companies
• Focus on potential future income from the property

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• Income capitalization approach

Material value method for single-family houses and apartments

What does the asset value method mean?

The asset value method looks at how much it would cost to build a new property today. It then deducts how much the property has lost in value in the meantime because it has become older. It is mainly used for houses and apartments to determine their pure material value.

In this method, the asset value of the property is determined on the basis of the production costs or new construction costs. These costs are adjusted for reductions in value due to ageing and wear and tear. Special features or structural characteristics can also be included in the valuation. The asset value method is particularly suitable for properties whose value is defined less by their earning power and more by their material substance.

Explained quickly and simply:

• Determination of the asset value by deducting the wear and tear value from the new construction costs
• Mainly used for single-family homes and condominiums
• Focuses on physical characteristics and reconstruction costs of the property

Read more about the:

• Asset value method

Residual method: Determination of the maximum investable amount

What is the residual method, simply explained?

The residual method is like looking at the money an investor has left over after deducting all costs. It helps determine the maximum amount an investor can spend on a property based on expected future income. It is a kind of safety net to ensure that an investment is profitable.

The residual method is not a standardized method, but is used to determine the maximum amount that can be invested. The costs to be borne by the investor are deducted from the sales value of the property. This method gives an indication of the maximum amount an investor can spend on a property based on the expected income.

Explained quickly and simply:

• Determination of the maximum investable amount by deducting investor costs from the sales value
• Not a standardized method, but a guide for investors
• Gives an indication of maximum investment potential based on expected returns

Determining the mortgage lending value: Minimizing the risk of loans

What does mortgage lending value calculation mean?

The mortgage lending value calculation is used by banks to determine the value of a property before it is used as collateral for a loan. The banks want to make sure that the property is worth enough to secure the money borrowed. They take into account how safely the property can be sold over a longer period of time. This helps to minimize the risk for the bank and to grant loans safely.

The determination of the mortgage lending value is also not standardized. Banks and the lending industry generally determine the mortgage lending value of the property in order to minimize the risk when granting a loan. The probability that the property can be sold safely at the mortgage lending value over a longer period of time is included in the valuation. In most cases, 70 to 80 percent of the achievable market value is made available as a credit line.

Explained quickly and simply:

• Determination of the mortgage lending value by banks to minimize the risk of loans
• Takes into account the security of selling real estate over a longer period of time
• Banks generally offer 70 to 80 percent of the expected market value as a credit line

Valuate property

You now know the typical methods we use to value a property, with a simple explanation. You can find more on this topic here:

• Valuate property

Valuing existing real estate: age & year of construction as a factor

Older properties are charming – no question about it! Apartments in old buildings are attractive because of their high ceilings and villas from past construction years because of their awe-inspiring architecture. The age of a property is also a decisive factor in real estate valuation. After all, the different types of houses and apartments have their own individual defects, depending on the year of construction. So what are the advantages and disadvantages of old existing properties?

Advantages and disadvantages of older real estate

A very clear advantage with older properties is the favorable purchase price. Thus, many investors buy the property for a favorable purchase price, renovate and refurbish it and sell it again at an immense profit. The disadvantage of older real estate lies in the maintenance costs. These are quite high compared to new construction. After all, in the past decades, little attention was paid to heat and sound insulation, as well as sustainability.

• Advantage: Favorable purchase price
• Disadvantage: High maintenance costs

Tips capital investors and owner-occupiers

The year of construction of a property and its age are important for both capital investors and owner-occupiers. Depending on your investment strategy, the advantages and disadvantages can affect you differently.

Old existing property for owner occupation: personal preference

As an owner-occupier, your well-being comes first. The same applies to your personal preferences and your very individual taste: Do you prefer a modern new apartment, a beautiful old building with stucco and high ceilings? A condominium in the old town, a townhouse in the suburbs, a country house in the countryside?

When thinking about your perfect property, take into account the defects that can occur depending on the year of construction and check properties before buying, using the checklists in the guide of the

• Real estate year of construction: checklists

Old existing property as an investment: return & cash flow

Old properties have a lower purchase price, but increase in yield and thus provide a fast and efficient cash flow after acquisition. However, caution is also required here: Depending on the year of construction, you must expect immense maintenance and repair costs. After all, not only a poor location has a negative impact on the value of a property, but also poor building fabric.

Conclusion: How old can a property be?

A general answer to this question cannot be formulated. It depends both on the age of the property and its respective defects, as well as on your individual preferences and goals. In any case, one thing is certain: the age of a house or apartment always affects the value of the property in the real estate appraisal. With sufficient reserves and maintenance, there are virtually no limits here.

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Definition: What is a ground lease?

You have found a house or an apartment building you are interested in, but it is located on a leasehold land? Or you have found a suitable property and it is subject to a ground lease? What does this mean? Simply explained, hereditary building rights mean that the right of ownership and the right of use are permanently separated. A distinction is made here between two parties: The ground lease provider and the ground lease taker. The ground lease holder leases the land and is then allowed to use the land in return for an annual ground rent.

Here is a summary of the ground lease:

• Ownership and usage rights permanently separated
• 2 parties: ground lease grantor and ground lease taker
• Leasehold in return for building rights

Advantage of a ground lease: Favorable purchase price

Of course, a ground lease has both advantages and disadvantages. Probably the biggest advantage is that the purchase price here is significantly lower than usual, since the purchase price for the land itself is omitted. Leaseholders also benefit from reduced ancillary purchase costs.

The purchase price of a property on leasehold land is significantly lower

Disadvantage: Monthly ground rent

In return for being allowed to use the land, you have to pay a monthly or annual ground rent to the owner of the land. In addition, the mortgage lending value of your property decreases significantly because the value of the land is constantly decreasing while the ground rent incurs costs.

The two disadvantages of a ground lease at a glance:

• Payment of the ground rent causes costs
• Collateral value of the property decreases

Conclusion: Is a ground lease worth it?

Buying or building a property on leasehold land therefore brings different advantages and disadvantages. While you can enjoy a low purchase price, a regular ground rent is incurred at the same time. And the mortgage lending value of the property also decreases.

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